1. Field of the Invention
The present invention relates generally to financial instruments and trading systems. More particularly, the present invention relates to future contracts for specific deliverable products on a daily settlement basis.
2. Description of the Related Art
This section is intended to provide a background or context. The description herein may include concepts that could be pursued, but are not necessarily ones that have been previously conceived or pursued. Therefore, unless otherwise indicated herein, what is described in this section is not prior art to the claims in this application and is not admitted to be prior art by inclusion in this section.
A financial instrument can be (1) a debt instrument, which is a loan with an agreement to pay back funds with interest; (2) an equity security, which is share or stock in a company, (3) a commodity instrument, which is an agreement to exchange money for goods or materials, e.g. gold, corn, oil, etc., or (4) derivatives, e.g., swaps, options, swaptions, etc. Financial instruments can include bonds, stocks, futures contracts, forward contracts, or option contracts. Other financial instruments, variations or combinations of these financial instruments may also exist.
A futures contract is a legally binding contract to buy or sell a commodity or financial instrument at a certain price for future delivery. Futures markets thrive because they attract two types of traders: hedgers and speculators. Hedgers, such as producers and processors of commodity products, seek to protect against adverse changes in the underlying cash price that may impact their business. Speculators include investors and traders who want to profit from price changes. Speculators and oppositely-positioned hedgers accept the price risks and rewards that hedgers wish to avoid. Futures markets provide the forum in which speculators can buy or sell standard guaranteed contracts quickly and—just as quickly—exit their positions to react to market changes.
Typically, futures contracts are traded through an auction like process, with all bids and offers on each contract made public. Through this, a market price is reached for each contract, based primarily on the laws of supply and demand. Traditionally, futures contracts have been traded in an open outcry environment where traders and brokers in brightly colored jackets shout bids and offers in a trading pit or ring. As of 2004, open outcry is still the primary method of trading agricultural and other physical commodity futures in the U.S., but trading in many financial futures in the U.S. has been migrating to electronic trading platforms (where market participants post their bids and offers on a computerized trading system). Almost all futures trading outside the U.S. is now conducted on electronic platforms.
Options on financial instruments (puts and calls) are derivative products whose value is derived from, among other factors, the underlying financial instruments, usually futures contracts or indexes. Option contracts are traded through an auction like process similar to futures trading. Options are traded either electronically or via open outcry.
Significant barriers to trading cash instruments exist, such as high transaction costs, exclusivity of markets, and incomplete information. In the particular case of trading United States government securities, transaction costs on Cantor Fitzgerald's eSpeed® electronic system can be as high as $18 per $1,000,000 face value. Such transaction costs may limit trading. In addition, many mutual funds do not have access to the eSpeed® Cantor electronic system. Such limited access leads to an exclusionary cash treasury market. Also, primary government securities dealers are currently not required to publish their transactions to the general public, leading to incomplete information for many market participants. As an example, FIG. 1 illustrates a conventional cash treasuries trading system. In this conventional system, customers 2 contact primary dealers 4 who access a trading system 6 to execute trades (buying, selling, etc.). The trading system 6 can be the eSpeed trading platform, the BrokerTek trading platform, or other similar existing trading platforms. Professional traders 8 (“locals”) also access the trading system 6.
Similar barriers exist in many markets for trading options on cash instruments. For example, the margins required to trade and hold positions in options on cash United States government securities are several times greater than the margin required to trade and hold positions in options on the same notional amount of U.S. treasury futures. A comparable lack of trade information and high execution costs plagues this market as well. In addition, the high barriers for trading options on cash treasuries cause many portfolio managers to hedge with futures and options that are mismatched to their portfolios, that is, the options track the futures contract and not necessarily the components comprising their portfolios. Furthermore, most options on cash instruments trade over-the-counter (OTC) between two counterparties, giving rise to default risk.
Thus, there is a need for a new class of financial instruments that addresses these and other shortcomings in traditional financial instruments and trading systems. Further, there is a need for new financial instruments that mirror cash (“spot”) instruments but which can be applied over a wide range of market sectors and financial classes. Even further, there is a need to have future contracts for specific deliverable products on a daily settlement basis